Rationality of survey data and tests for market efficiency in the foreign exchange markets

The rational expectations hypothesis (REH) and the market efficiency hypothesis (MEH) are tested in the foreign exchange markets using the cointegration theory. Survey data on expectations concerning the British pound, German mark, Swiss franc and Japanese yen are used. Spot exchange rates, expected exchange rates and the forward rates are found to follow a random walk process. All the test results support the REH, but not the MEH. The causes behind the failure of the MEH are explained.